Research Paper on "Mexico Regional Leader"

Research Paper 20 pages (7688 words) Sources: 10

[EXCERPT] . . . .

Miguel Sahagun

Mexico: Regional Leader

It was over twenty years ago that Mexico began opening up its trade with the implementation of a number of unilateral policies and its accession to the General Agreement on Tariffs and Trade (GATT) in 1986. Since then it has been increasing its presence on international markets, and activities related to external trade have grown to the extent that they currently account for nearly two thirds of its GDP.

Bilateral, regional and multilateral negotiations have yielded preferential conditions for access to markets in goods and services over third countries. There is currently a network of twelve FTAs providing secure, preferential access to the markets of 44 countries, over one billion potential consumers and three-quarters of world GDP. There are also six Economic Complementarily Agreements (ECAs) and there are twenty-three Reciprocal Investment Promotion and Protection Agreements (APPRIs) in force, which provide legal certainty both for Mexican investments abroad and for foreign investment in Mexico.

Mexico by far is the major trading power in Latin America. In 2000 Mexico's trade easily surpassed that of Argentina, Brazil, and Chile combined. The transformation of Mexico from a closed economy to a major trader was the result of improvisation and crisis led policy changes as well as vision and long-term planning. In the other hand, the rise of China in the global economy has raised major issues for the Mexican economy. First, Mexico was not prepared for the enormous new trade relationship with China and second, China's massive exports cause that several industrial sectors in Mexico suffer substantially from Chinese competition both domestically and internationally, especially with the U.S.

Despite the image of Mexico as a major trade power pushing for trade liberalization across many fronts, the political economy of trade policy indicates that Mexico could become a stumbling bloc for multilateral trade liberalization if new policies or structures are not made in the near future. What does Mexico need to do to meet regional and Chinese challenges and what complementary policies are required from the Mexican Government? This paper will explain Mexico's transformation from a closed economy to a trading power, current agreements, policies, and challenges with Latin American countries and China and finally, I will propose new policies, agreements, and approaches to consolidate Mexico as Regional leader by uniting Latin American Countries in a multilateral system not only based in trade, but also social education and health.

Mexico's Roadmap to trade liberalization

Mexico remained a highly protected economy from the post-World War II era up until the mid-1980s. It took three economic shocks from trade policy to be altered in a significant way. Ortiz (Studer & Wise, 2007) described them as follows: The first was the macroeconomic instability of the early 1970s and devaluation of the peso in 1976 (after twenty-two years of fixed parity to the U.S. dollar); the second a severe economic downturn in 1982-1983 caused by a drop in the world price of oil an dries in international interest rates (which pushed Mexico to verge of defaulting on its foreign debt); the third shock was the 1986 stock market crash and a devaluation of the peso in 1987.

From the late 1940s until the mid-1970s the basic thrust of trade policy was the use of high tariffs and import licensing requirements for a broad range of products, with the aim of fostering import substitution industrialization (Solis, 1991). The policy was quite successful, especially from the mid 1950s until the early 1970s. The trade reforms pursued from 1977 to 1980 consisted of export promotion through fiscal, financial, and energy subsidies, available as a result of oil price hike by the Organization of Petroleum Exporting Countries (OPEC). Oil was becoming increasingly important for the Mexican economy after the discovery of significant reserves in the mid 1970s (Studer & Wise, 2007). Some trade liberalization also occurred during this window of time.

In 1978 the U.S. government, seeking to avoid a permanent trade deficit with Mexico, whereby U.S. imported oil from its southern neighbor while the latter maintained a closed economy, issued "emphatic invitations" for Mexico to join the GATT before the end of Tokyo Round (1973-79) (Flores, 1998). This incipient interest in GATT was maintained when Lopez Portillo became president in 1976, and in January 1979 Mexico finally began negotiations for GATT accession. Government policy makers made clear that Mexico would accept accession only if three basic principles were upheld: that Mexico be recognized as a developing country, that it be allowed to implement measures required to achieve the aims of domestic economic and social development policies, and that its liberalization commitments made during the Tokyo Round be considered as part of the concessions given for GATT accession (Flores, 1998).

In March 1980 Lopez Portillo made public his decision to postpone Mexico's accession to GATT. The announcement, made on the anniversary of the nationalization of the oil industry in 1930 sated that it was not the appropriate time for Mexico to join GATT. One of the main reasons given was the world energy plan that Mexico had proposed at the United Nations, the idea being that Mexico's new status as an oil exporter could be incompatible with some GATT provisions, such as bilateral negotiations were preferable to multilateral ones as a way to bridge the gap between North and South.

Unfortunately, the situation imploded in 1982, when the banks halted lending, Lopez Portillo devalued the peso, and Mexico's economic fundamentals literally collapsed. By the time Mexico decided to restart GATT accession negotiations in late 1985, national economic circumstances had changed drastically. For lack of any viable alternatives in the aftermath of the 1982 crisis, the country had embarked on a rapid course of unilateral trade liberalization.

The decision to liberalize unilaterally just before it was about to undertake trade negotiations reflects the dire economic straits that had befallen Mexico and the extent to which trade opening and GATT entry become part of an overall economic reform program aimed at stabilizing the economy and restoring growth. As had been the case in 1979, the 1986 GATT protocol fulfilled all of Mexico's basic requirements. Mexico successfully negotiated a 50% bound tariff level, higher than the rates it was currently applying, and an eight-year phase-in period, during which tariffs could be higher than the bound level for certain products (Flores, 1998). Mexico finally joined GATT in 1986.

The Political Economy of Mexican Trade Policy

From the time of Lopez Portillo (1976-1982) up until the end of the Zedillo administration (1994-2000), trade policy was conducted by the chief executive with very little effective opposition, either form or civil society groups and organizations. Just as Lopez Portillo personally decided against the entry into GATT, so did De la Madrid favor entry, under dire economic circumstances. Salinas managed to negotiate NAFTA despite numerous protests from diverse groups within Mexico. Thus, the political system and dominance of the Partido Revolucionario Institucional (PRI) during the 1980s and 1990s were key ingredients in allowing the radical shifts in trade policy observed during that period. (Studer & Wise, 2007)

Economic policymaking has become more pluralistic in recent years. In 2000, Vicente Fox, the candidate from the Partido the Accion Nacional (PAN), won the presidential election after more than seventy years of PRI dominance. Representation in both chambers of federal legislature has become more pluralistic and their members more assertive in foreign policy matters. In addition, intraexecutive divisions over foreign policy have become more explicit. (Ortiz in Studer & Wise, 2007).

Mexico and the Multilateral Trading System

In the two decades since Mexico joined the GATT, it has become an important trader in Latin America, participates actively in multilateral trade negotiations and has been one of the most dynamic participants in regional trade agreements. According to World Trade Organization, currently, more than seventy percent of the country's GDP derives from trade. According to Ortiz (Studer & Wise, 2007) the present situation stands in stark contrast to Mexico's trade practices of relatively recent times. In 1982, Mexico still had a closed economy and delayed joining the GATT until 1986. Even in 1980, during the oil price boom, Mexico's exports amounted to only U.S. $33 billion, compared with U.S. $178 billion in 2003.

According to Ortiz (Studer & Wise, 2007), when Mexico finally joined GATT in 1986, it was after a period of unilateral trade liberalization ushered in as part of a larger macroeconomic stabilization effort. Throughout the 1990s Mexico negotiated a series of free trade agreements (FTAs), chief among them the North American Free Trade Agreement (NAFTA), Thereafter, Mexico's multilateral commitments were not as pressing in light of the importance that NAFTA came to play as regional initiative.

During the 1990s the most significant benchmarks for Mexican trade policy were the entry into force of NAFTA and several other FTAs. In terms of export composition there were no significant changes but export volumes grew dramatically. The remarkable growth was closely linked to bilateral trade with the United States. While in 2004, seventy-four percent of Mexico's trade was with the United… READ MORE

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